This article originally appeared on The Div-Net on October 6, 2011
As an investor, my primary objective is to preserve capital and then grow it. One of the best ways to preserve capital is to invest in defensive stocks that have less overall volatility than the general markets. These stocks usually aren’t your fast growth stocks with huge catalysts behind them, but offer a sense of safety and stability…especially when there is so much uncertainty around us.
Today I want to present two consumer dividend growth stocks that have shown a lot of safety and have far outperformed the overall market.
The Coca-Cola Company (KO)
Coca-Cola is the world’s largest manufacturer, distributor, and marketer of nonalcoholic beverage concentrates and syrups. The firm also sells a variety of noncarbonated drinks such as water, juices, and teas. With almost three fourths of the company’s revenue generated outside the United States, Coke’s footprint extends throughout the world. Coke’s core brands include Coca-Cola, Sprite, Dasani, Powerade, and Minute Maid.
This stock is currently yielding 2.87%, which offers current income while you wait out the rise in the markets. That yield comes with 49 straight years of dividend growth as well. Coca-Cola offers an investor the strength and safety of one of the world’s best known brands. This is a great business and Mr. Market seems to have priced that in. The S&P is down just over 9% on the year, while KO is only down 0.36%. This stock has far outperformed the S&P 500. This company offers great preservation of capital. As Warren Buffet said: “Rule No. 1: Don’t lose money. Rule No. 2: Don’t forget rule no. 1.”. It has a debt/equity ratio of 0.3.
McDonald’s Corporation (MCD)
McDonald’s generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of March 2011, there were 32,800 locations in 117 countries, including 26,400 operated by franchisees/affiliates and 6,400 company units.
This stock is currently yielding 3.26%, which is actually quite solid for such a safe large-cap company. This kind of yield offers a floor for the stock’s price. This business is absolute solid. When you invest with McDonald’s you’re getting a piece of the profits from one of the best known brands in the world. It has a fair amount of debt with a debt/equity ratio of 0.7, but this is actually much lower than a lot of other companies in its industry. It has 35 years of dividend growth behind it, and there is no reason to believe this is going to abate anytime soon. MCD has risen 11.8% YTD, vs. the S&P 500 at a 9% loss for the year. This stock has greatly outperformed the market.
Full Disclosure: I’m long KO and MCD.
Thanks for reading.
This comment has been removed by the author.
DM,
I’m afraid I’ve given away a bit of safety in the form of higher yield. This being said, a lot of my stocks are still beating the averages, with a few fairing worse. When I get back to even in some of these more volatile stocks I’m going to rotate into some safer plays.
BTW, Income Pirate is back up and running again. I just posted fresh content if your interested…
http://www.incomepirate.com/save-money-by-being-organized/
It’s really hard to beat 49 years of dividend growth…
Income Pirate
My bad DM, forgot I had already commented on this topic over at DivNet! Fully agree on the value of consumer stocks still though…
Pirate,
Thanks for stopping by!
I’m glad to hear your site is back up and running. I’ll have to make sure and stop by. The safety of these stocks comes with the price they’re trading at, which is a premium to some of the riskier plays you speak of. Safety is expensive, unfortunately.
Best wishes and I hope the relaunched site works out great for you!
DFTLR,
No problem! I appreciate you stopping by and supporting the site! 🙂
Great article, DM.
I’d also like to add KO and MCD to my portfolio, but the current price level doesn’t really offer an entry for me so I’ll keep both stocks on my watchlist.
Best of luck with your investments!
MCD does very well especially during turbulent times. It’s growth even during the lost decade is impressive.
I love KO as a company. But the stock is overpriced imo. Based on the past 3 years P/E is 24 while P/FCF is 25.
The two Consumer stocks in my dividend stock portfolio are Procter & Gamble (PG) and Kellogg (K). PG seems to be in a lot of dividend growth portfolios. In the four years I have owned Kellogg, they have increased their annual dividends by 9.7%, 10.3%, 8.0%, and 6.2% respectively. With grain prices dropping, I look for Kellogg to raise their next dividend increase higher than the previous increase. Good luck to all.
Westphalian,
I agree on the price. I would consider both a little pricey at current levels and I haven’t added to either recently. Unfortunately, more often than not you pay for safety. I think both are still solid long-term (10 years+) buys, however. Both are pretty bulletproof over the long haul.
Best wishes!
MoneyCone,
I agree. MCD has been incredible. I purchased in the mid-$70’s and only wish I would have purchased more. Like I always say…so many equities, so little cash.
Have a great weekend!
defensiven,
I agree. KO is expensive at current levels. Like I commented above, safety usually comes at a premium, and that’s why KO and MCD have both been so strong this year. I’d like KO closer to $60 before adding to my position. It’s sad that it’s so expensive, because it’s a small part of my portfolio and I’d prefer to at least triple my position size. It’s not to be right now, however.
Best wishes!
Scott,
Thanks for stopping by.
I’m long PG, but do not have any position with K. I know that K and GIS are both popular among dividend growth investors. I’m truly glad that K has been a strong performer for you. I hope it continues to run!
Take care!
GREAT POST – AS ALWAYS!!
Steve
Common Cents
http://www.commoncts.blogspot.com
Steve,
Thanks for stopping by!
Best regards.
Excellent post DM! I totally agree with you, these are companies that I like to refer to as “recession proof”.
Kanwal,
Thanks for stopping by!
I agree with you as well. “Recession proof” is a great term for companies like these. They have a wide economic moat and people will continue to eat and drink, no matter how bad the economic climate. Cheap, fast food and prepackaged liquid on the go will likely never go away.
If I had to pick between Mcdonald’s and Coca Cola. I would pick Coca Cola. They are primarily a beverage company and nothing else. Not that I don’t think Mcdonald’s is not a good stock pick but Coca Cola is just I would say a little better because they specialize in one narrow area that they are very good at.